Monday, March 14, 2011

Japan Quake Affects Little in South Korean Economy, So Far

By Evan Ramstad The effect of Japan’s earthquake and tsunami on South Korea’s economy seemed small on the first day of business since the twin disasters.

South Korea’s benchmark stock index, the Kospi, initially traded lower Monday. But as the day wore on, investors gained confidence that the South Korean businesses would experience few effects, stock prices recovered and the Kospi ended the day at 1,971, up almost 1% from Friday’s close of 1,955.

There was a notable exception: Korean firms associated with the nuclear-power industry suffered steep drops in share value. Shares in KEPCO Engineering & Construction, a designer of nuclear power plants, and KR Plant Service & Engineering, which maintains and operates nuclear plants, both fell about 14%.

Various branches of the government and the Bank of Korea announced they were setting up “emergency” committees and task forces to assess the potential effect on the Korean economy. Several committees in the National Assembly said they would hold hearings to review how South Korea was helping Japan and what the economic impact might be here.

On the trade front, South Korea imports about $65 billion worth of goods from Japan every year, accounting for about 15% of overall imports. Much of that is production equipment that South Korean manufacturers use to make steel, cars, electronics and petrochemical products.

At mid-afternoon, South Korea’s Ministry of Knowledge Economy noted the connection in its first official assessment, which said: “Some Korean firms rely significantly on Japan for materials and components to complete their products. If conditions in Japan worsen, that will also disrupt our industries, hurting Korea’s exports.”

The ministry cited several key components imported from Japan that might be among the first disrupted, including steel for shipbuilding, system integration chips for electronics products and components for flat-screen panels.

Several Korean companies said Monday they were in touch with Japanese suppliers to find out what was happening, but no one announced any disruptions in supplies from Japan or production in Korea.

Analysts at Citibank published a sector-by-sector analysis on the potential impact in South Korea. They concluded that Korean petrochemical companies will benefit because they’ll be asked to fill in for some of the refining capacity that Japan lost in the disaster. Steel companies may benefit from higher steel prices shaped by disruptions in Japan’s steel output.

Korean banks and insurance firms, with little exposure to Japan, fell in a neutral category in the Citibank assessment.

The sector most likely to lose, the Citibank analysts said, was tourism and, to a smaller degree, retail. Japanese tourists have poured into Korea since early 2009, when the gap between the Japanese yen and Korean won made it very cheap for them to visit and shop in South Korea. Japanese tourists account for about 2% of sales at some department stores.

Longer-term, South Korean businesses, government officials and economists will watch ever more closely the value of the Japanese yen. If the yen strengthens against the U.S. dollar as some economists predict, that will make the value of the Korean won look less expensive against the dollar. In turn, that should make Korean products that are exported to dollar-based markets more attractive and boost the Korean economy.
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